Wednesday, August 29, 2007

Have you ever been to a restaurant with a large group of people and split the bill, so everyone pays the same amount? Most of us have; it is common among my friends. Under these circumstances, have you ever been temped to order more than you otherwise might? After all, if you spend an extra $1, you only pay $1 x 1/N (where N is the number of people in your group). Have you seen your friends order things (e.g., one more $10 cocktail, the lobster) you think they wouldn't otherwise when you are splitting the bill? Again, they alone get the benefit of the food and everyone shares in paying for it.

The first person who expressed concern about this to me (in 1998) was Sarah Reber, an economist with excellent economic intuition. Sarah's guess was that this problem was particularly severe for (alcoholic) drinks, and less severe for food. I hadn't given it much thought, but recently found out about this paper by Uri Gneezy, Ernan Haruvy and Hadas Yafe which provides nice evidence that this is a problem. The authors found groups of people going to a restaurant. At the beginning of the meal, they were randomly told that a) they would each pay for their own meal, b) that they would split the total bill equally, or c) that the person running the experiment would pick up the tab. People spent least in (a) when they bore the full cost of ordering more; they spent less in (b) when they bore only some of the cost of ordering more; they spent least in (c) when they bore none of the costs. So people spend more when their friends pick up much of the cost of this extra ordering. They don't take into account the harm they do their friends by ordering more.

The efficient outcome is obtained if everyone pays for themselves, so people bear the full cost of their food (which makes sense given that they also get the full benefit of eating). So why is it so common to split the bill? One answer is that it is easier. It is always hard to figure out each person's share of the tax and tip. Another is that it is awkward to suggest that everyone pays for themselves. If you took the harm you did to your friends by ordering more (when you are splitting the bill) into account when ordering, there would be no problem with splitting the bill. Suggesting that you want everyone to pay for themselves is effectively accusing your friends of not caring about your welfare. Now that's an awkward conversation.